U.S. Bank National Asscoiation, as Trustee on beha v. Requilman et al

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
-1-	MEMORANDUM DECISION
UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF CALIFORNIA
In re
CRISTINA RAMOS REQUILMAN,
Debtor.
U.S. BANK NATIONAL ASSOCIATION, as
Trustee on behalf of the holders of
the Terwin Mortgage Trust 2006-7,
Asset Backed Certificates, TMTS
Series 2006-7,
Plaintiff,
vs.
CRISTINA RAMOS REQUILMAN, and
E. LYNN SCHOENMANN, Chapter 7
Trustee,
Defendants.
E. LYNN SCHOENMANN, Chapter 7
Trustee,
Counter-Claimant,
vs.
U.S. BANK NATIONAL ASSOCIATION, as
Trustee on behalf of the holders of
the Terwin Mortgage Trustee 2006-7,
Asset Backed Certificates, TMTS
Series 20066-7,
Counter-Defendant.
____________________________________
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
Case No. 08-32240 TEC
Chapter 7
Adv. Proc. No. 09-3011 TC
MEMORANDUM DECISION
Signed and Filed: December 11, 2009
________________________________________
THOMAS E. CARLSON
U.S. Bankruptcy Judge
________________________________________
Entered on Docket
December 14, 2009
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
Case: 09-03011 Doc# 30 Filed: 12/11/09 Entered: 12/14/09 08:06:08 Page 1 of
14

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
-2-	MEMORANDUM DECISION
The court conducted a trial in this action on October 27,
2009. 	Michael St. James and Daniel J. Mulligan appeared for
chapter 7 trustee E. Lynn Schoenmann (Trustee). 	Timothy M. Ryan
appeared for U.S. Bank National Association (the Bank). 	Upon due
consideration, and for the reasons set forth below, which shall
constitute the court’s findings of fact and conclusions of law, I
determine that while Trustee is entitled to rescind the loan
transaction at issue on the condition that Trustee tender to the
Bank the money advanced by the Bank, Trustee should be afforded no
relief in this action because Trustee is unable to make the
required tender within a reasonable period of time.
FACTS
Cristina and Eugene Requilman own a single-family residence at
21 Portola Avenue, Daly City, California (the Residence). 	On April
5, 2006, they refinanced the Residence by taking out two loans
against the property. 	The first of these loans was in the amount
of $568,000 and was secured by a first deed of trust against the
Residence (the Senior Loan). 	The second of these loans was secured
by a second deed of trust against the Residence and currently has a
balance of approximately $142,000 (the Junior Loan). 	Both the
Senior Loan and the Junior Loan are currently held by the Bank.
Cristina Requilman (Debtor) filed a petition under Chapter 7
of the Bankruptcy Code on November 21, 2008. 	E. Lynn Schoenmann is
the trustee duly appointed in that case.
On December 19, 2008, the Bank filed a notice for relief from
stay seeking the right to foreclose upon the Senior Loan.
On January 9, 2009, Trustee mailed to the Bank a notice of
rescission regarding the Senior Loan under the Federal Truth in
Case: 09-03011 Doc# 30 Filed: 12/11/09 Entered: 12/14/09 08:06:08 Page 2 of
14

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28 1 Trustee does not contend that the Bank committed any TILA
violation regarding the Junior Loan.
-3-	MEMORANDUM DECISION
Lending Act (TILA). 	In the notice of rescission, Trustee asserted
that Debtor was not provided two copies of a Notice of Right to
Cancel properly completed to indicate the last date upon which that
right could be exercised, as required by TILA.
On January 2, 2009, Trustee filed opposition to the Bank’s
motion for relief from stay, contending that such relief from stay
was inappropriate because Trustee had rescinded the Senior Loan
under TILA.
At the January 12, 2009 hearing on the Bank’s motion for relief
from stay, the Bank denied that a TILA violation had occurred. 	The
court directed the Bank to file an adversary proceeding contesting
the validity of the Trustee’s notice of rescission, and denied the
motion for relief from stay pending the outcome of that proceeding.
On January 29, 2009, the Bank filed the present action.
Attached to the complaint is a copy of a receipt signed by Debtor
acknowledging that she was provided two copies of a properly
completed Notice of Right to Cancel regarding the Senior Loan.
Trustee filed an answer and counterclaim, alleging that Debtor had
not received two copies of a properly completed Notice of Right to
Cancel regarding the Senior Loan. 1
Upon consideration of the evidence received at trial, I find
that Debtor did not receive two copies of the Notice of Right to
Cancel, properly completed to indicate the last date on which Debtor
could exercise that right. 	Debtor testified that she preserved in
one file all the papers she received regarding the Senior Loan. 	I
credit that testimony. 	The file contained two copies of a Notice of
Right to Cancel not completed to indicate the last date upon which
Case: 09-03011 Doc# 30 Filed: 12/11/09 Entered: 12/14/09 08:06:08 Page 3 of
14

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
-4-	MEMORANDUM DECISION
that right could be exercised. 	The file appeared to be complete in
that it included a large number of documents from the closing,
including approximately 40 notices, disclosures, certifications,
acknowledgments, riders, and the like, in addition to the note and
deed of trust. 	The only evidence suggesting that Debtor had
received copies of a properly completed Notice of Right to Cancel
was the receipt that Debtor signed. 	Taken together, these
circumstances indicate to the court that the Bank provided Debtor
with two uncompleted copies of the Notice of Right to Cancel, that
the Bank did prepare a properly completed version of the Notice,
that the Bank showed the properly completed Notice to Debtor at the
closing, but that the officer executing the closing somehow forgot
to provide Debtor two copies of the properly completed Notice
regarding the Senior Loan.
Just before trial, Trustee indicated her intent to expand the
factual inquiry beyond the question whether Debtor received copies
of a properly completed Notice of Right to Cancel, stating in her
trial brief that the Senior Loan “is symptomatic of the predatory
lending practices which caused the sub-prime meltdown: loans to
borrowers who could not realistically afford to repay them.” 	The
Bank objected to the introduction of any such evidence on the basis
that Trustee had not alleged any such facts in her answer and
counterclaim, that Trustee had not identified any such evidence in
her Rule 26 disclosures, and that Trustee had not indicated her
intent to introduce any such evidence in the Joint Pretrial
Statement filed by the parties only three weeks before trial. 	The
court sustained the Bank’s objection and barred introduction of the
evidence in question, finding that the introduction of previously
Case: 09-03011 Doc# 30 Filed: 12/11/09 Entered: 12/14/09 08:06:08 Page 4 of
14

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
-5-	MEMORANDUM DECISION
undisclosed evidence would be unduly prejudicial to the Bank.
DISCUSSION
The parties agree on the following points of law. 	That the
Senior Loan was subject to TILA. 	That in a loan transaction subject
to TILA, the borrower is afforded a three-day cooling-off period
after signing the note, during which the borrower may cancel the
loan. 	That the borrower must be provided with two copies of a
Notice of Right to Cancel, explaining the right to cancel and how
that right can be exercised. 	That the copies of the Notice of Right
to Cancel provided to the borrower must indicate the last date upon
which borrower can exercise the right to cancel. 	That if the copies
of Notice of Right to Cancel provided the borrower are not completed
to indicate the last date upon which the loan can be cancelled, the
borrower may exercise the right to cancel at any time within three
years of the making of the loan. 	That upon receipt of timely notice
of rescission (cancellation) of the loan, the lender is obligated to
cancel the security agreement. 	That upon the lender’s cancellation
of the security agreement, the borrower is required to tender to the
lender the amount received from the lender, minus the amount of any
interest and fees paid to the lender (hereinafter the Net Loan
Proceeds). 	That in appropriate circumstances, a court may require
the borrower to tender the Net Loan Proceeds before the lender is
required to cancel the security agreement. 	That in a chapter 7
case, the trustee may exercise any right to cancel that the debtor
had on the petition date.
The principal dispute between the parties in the present case
is whether the court should require Trustee to tender the Net Loan
Proceeds in cash before Bank is required to cancel the deed of trust
Case: 09-03011 Doc# 30 Filed: 12/11/09 Entered: 12/14/09 08:06:08 Page 5 of
14

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
-6-	MEMORANDUM DECISION
securing the Senior Loan.
The law governing this question is set forth in section 226.23
of Regulation Z of the Federal Reserve Board, which provides:
(d) Effects of rescission.
(1) When a consumer rescinds a transaction, the security
interest giving rise to the right of rescission becomes
void and the consumer shall not be liable for any amount,
including any finance charge.
(2) Within 20 calendar days after receipt of a notice of
rescission, the creditor shall return any money or
property that has been given to anyone in connection with
the transaction and shall take any action necessary to
reflect the termination of the security interest.
(3) If the creditor has delivered any money or property,
the consumer may retain possession until the creditor has
met its obligation under paragraph (d)(2) of this section.
When the creditor has complied with that paragraph, the
consumer shall tender the money or property to the
creditor....
(4) The procedures outlined in paragraphs (d)(2) and (3)
of this section may be modified by court order.
12 C.F.R. § 226.23.
In determining whether to modify the normal sequence of events
to require prior tender of the Net Loan Proceeds, a court should
keep in mind that the objective of rescission under TILA is to
restore the parties to the status quo ante--to put each party in the
position that it enjoyed before the loan was made. 	Wepsic v.
Josephson (In re Wepsic), 231 B.R. 768, 775-76 (Bankr. S.D. Cal.
1998). 	To this end, the Ninth Circuit has held that a court may
condition rescission upon prior tender of the Net Loan Proceeds,
where the TILA violation giving rise to the right to rescind is not
egregious, and where the lender would otherwise be left with an
unsecured claim in the borrower’s bankruptcy.
As we explained, whether a decree of rescission should be
conditional depends upon “the equities present in a
particular case, as well as consideration of the
legislative policy of full disclosure that underlies the
Case: 09-03011 Doc# 30 Filed: 12/11/09 Entered: 12/14/09 08:06:08 Page 6 of
14

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
-7-	MEMORANDUM DECISION
Truth in Lending Act and the remedial-penal nature of the
private enforcement provisions of the Act.” 	Indeed, in
LaGrone we held that rescission should be conditioned on
repayment of the amounts advanced by the lender. 	We noted
that the TILA violations there were not egregious (failure
to disclose an acceleration clause and amount financed in
the broker’s statement, and to delineate additional data
from mandatory data), and that the equities favored the
creditor who would otherwise have been left in an
unsecured position in the borrower’s intervening
bankruptcy.
Yamamoto v. Bank of New York, 329 F.3d 1167, 1171 (9th Cir. 2003)
(emphasis in original)(citations omitted).
The facts and circumstances of the present case indicate that
this court should exercise its discretion to require prior tender of
the Net Loan Balance as a condition of rescission.
First, the TILA violation was not egregious. 	Debtor was
provided two copies of the Notice of Right to Cancel. 	Those copies
provided Debtor the following information regarding her right to
cancel the loan.
You are entering into a transaction that will result in a
mortgage, lien or security interest on or in your home.
You have a legal right under federal law to cancel this
transaction, without cost, within three business days from
whichever of the following events occurs last:
1. 	the date of the transaction, which is _______________
2. 	the date you receive your Truth in Lending
disclosures; or
3. 	the date you receive this notice of your right to
cancel.
...
You may use any written statement that is signed and dated
by you and states your intention to cancel, or you may use
this notice by dating and signing below. 	Keep one copy of
this notice because it contains important information
about your rights.
The copies of the Notice of Right to Cancel were deficient only in
that they did not indicate the specific date on which the right to
cancel would expire, as required by the statute. 	At the loan
closing, Debtor was also shown a copy of the Notice of Right to
Cancel on which the last date for cancellation was properly
Case: 09-03011 Doc# 30 Filed: 12/11/09 Entered: 12/14/09 08:06:08 Page 7 of
14

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
2 Trustee testified that she attempted to sell the Residence
in February 2009, that the highest offer she received at the time
was only $475,000, and that her broker advised her that the
Residence has appreciated by fifteen percent since February. 	With
such appreciation, net sales proceeds after costs of sale (6%)
would be about $513,000. [$475,000 x 1.15 x .94 = $513,475].
-8-	MEMORANDUM DECISION
completed, and acknowledged in writing receipt of the completed
form. 	These circumstances indicate that the Bank’s violation of
TILA was neither extensive nor intentional, and that Debtor received
very substantial notice of the right to cancel and when that right
would expire.
Second, if this court does not require prior tender as a
condition of rescission, and the Bank is left with only a general
unsecured claim, the Bank would be deprived of its statutory right
to return of the $464,000 Net Loan Proceeds. 	It is undisputed that
the bankruptcy estate has no assets other than the Residence. 	Under
the most optimistic scenario suggested by Trustee at trial, a sale
of the Residence would yield about $513,000 after costs of sale. 2
If the Senior Loan was relegated to the status of a general
unsecured claim, those sale proceeds would first be applied to pay
the junior deed of trust (approximately $142,000) and the fees and
other expenses of Trustee and her counsel, before the remainder was
shared by the Bank and other unsecured creditors ($71,500
scheduled). 	It is clear that the Bank would not receive the full
amount of the Net Loan Proceeds ($464,000) if its right to payment
of that sum was relegated to the status of a general unsecured
claim.
It is undisputed that Trustee is unable to tender the required
sum immediately. 	The question thus arises whether she should be
afforded additional time to do so. 	I conclude that a trustee
ordinarily should be afforded a reasonable period of time to sell
Case: 09-03011 Doc# 30 Filed: 12/11/09 Entered: 12/14/09 08:06:08 Page 8 of
14

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
3 The Residence would have to sell for $642,000 to pay the
required tender amount, the junior deed of trust, costs of sale,
and return a surplus to the estate. [$464,000 (required tender) +
$142,000 (junior trust deed) x 1.06 (costs of sale = $642,000
(necessary sale price)] Such a price would represent a 35 percent
increase in value in the nine months since the February 2009 offer,
far greater than the 15 percent increase suggested by Trustee.
[$642,000 (necessary sale price) divided by $475,000 (February 2009
offer) = 1.35 (35 percent increase in value)]
-9-	MEMORANDUM DECISION
the collateral. 	This is so, because one of the effects of the
lender contesting the validity of rescission is that prior to a
court order confirming the validity of the rescission, a trustee can
convey good title only by paying the pre-rescission balance of the
secured note. 	I also conclude, however, that a trustee should not
be afforded time to sell the property if it is clear that the
property cannot be sold within a reasonable period of time for a
price sufficient to make the required tender, or if it is clear that
a sale will provide no benefit to the estate.
In the present case, Trustee should not be afforded time to
sell the collateral, because the Residence does not have sufficient
value to pay the required tender and leave any unencumbered proceeds
for the estate. 	The highest sale price Trustee can reasonably
expect to receive in the near future would yield about $513,000
after costs of sale. 	While that sum would be sufficient to pay Bank
the required tender of $464,000, it would leave nothing for the
estate, because the Bank holds a second note secured by a junior
deed of trust, which Trustee acknowledges is fully enforceable under
nonbankruptcy law, and which has a current balance of approximately
$142,000. 3
Trustee’s counsel raised at trial the prospect that Trustee
could make the required tender in cash and still recover some money
for the benefit of unsecured creditors by voiding the junior deed of
Case: 09-03011 Doc# 30 Filed: 12/11/09 Entered: 12/14/09 08:06:08 Page 9 of
14

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
-10-	MEMORANDUM DECISION
trust under section 506(d). 	When Trustee tried to sell the
Residence in February 2009, the highest offer she received was only
$475,000. 	If the Residence were valued at that amount, the junior
deed of trust would be wholly unsecured, and any post-February 2009
appreciation would be unencumbered.
Trustee’s scenario depends upon valuing the junior lien as of a
date other than the date of sale of the property. 	For the following
reasons, I decline to adopt such an approach.
First, such authority as there is states that “[i]f the
collateral is actually sold during the pendency of the case, the
determinative date [for valuation] should be the time of disposition
for the purposes of measuring entitlements to the proceeds of the
disposition.” 	Takisaki v. Alpine Group, Inc. (In re Alpine Group,
Inc.), 151 B.R. 931, 935-36 (9th Cir. BAP 1993) (value of secured
claim determined by actual sales proceeds rather than petition
date). 	The date-of-sale approach is especially compelling in a
chapter 7 case, where sale of the property of the estate is the
trustee’s normal course of action, and it is not necessary to value
collateral at an early date and without a sale to permit the
restructuring of liens against property that the debtor plans to
retain.
Second, a market transaction is always a more reliable measure
of value than a court determination, and should be employed absent
some strong reason to value the collateral in another manner. 	See
Romley v. Sun Ntl. Bank (In re Two “S” Corp.), 875 F.2d 240, 243
(9th Cir. 1989) (price paid at commercially reasonable sale is
better evidence of property’s value than prior appraisals).
Third, and most important, employing a pre-sale valuation date
Case: 09-03011 Doc# 30 Filed: 12/11/09 Entered: 12/14/09 08:06:08 Page 10 of
14

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
-11-	MEMORANDUM DECISION
to reduce the value of a lien before sale would undermine the
protections afforded secured creditors in section 363(k), which
permits a secured creditor to credit bid the allowed amount of its
claim at any sale proposed by trustee. 	The purpose of section
363(k) is to provide a check upon the trustee’s proposed sale price,
by permitting the secured creditor to take the collateral if the
proposed sale price would not pay the secured claim in full and the
creditor believes it could do better. 	Cf. In re Woodridge North
Apts., Ltd., 71 B.R. 189, 191-92 (Bankr. N.D. Cal. 1987) (purpose of
right to credit bid is to protect secured creditor against risk of
undervaluation of collateral).
Trustee next argues that she should not be required to make the
tender in cash, but should be permitted either to tender an
unsecured claim in the bankruptcy case, or to tender the Residence
to the Bank after the Bank returns to the estate in cash all
interest and fees paid by Debtor. 	This argument is unpersuasive.
It would be inappropriate to permit Trustee to tender an unsecured
claim for the very reason the Ninth Circuit has upheld decisions
altering the sequence for rescission: if tendered an unsecured
claim, the Bank would not actually receive the Net Loan Proceeds,
and the statutory goal of restoring the parties to the status quo
ante would not be fulfilled. 	Trustee should also not be permitted
to tender the Residence in-kind after receiving cash payment of all
interest and fees paid by Debtor. 	First, Regulation Z expressly
states that where the borrower has received money, then upon
rescission, the borrower shall ordinarily return money to the
lender.
If the creditor has delivered any money or property, the
consumer may retain possession until the creditor has met
its obligation under paragraph (d)(2) of this section.
Case: 09-03011 Doc# 30 Filed: 12/11/09 Entered: 12/14/09 08:06:08 Page 11 of
14

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
-12-	MEMORANDUM DECISION
When the creditor has complied with that paragraph, the
consumer shall tender the money or property to the
creditor or, where the latter would be impracticable or
inequitable, tender its reasonable value.
12 C.F.R. § 226.23 (d)(3).
Second, if the value of the Residence was insufficient to pay
the full principal balance on the Senior Loan, the Bank would not be
restored to the status quo ante. 	Wepsic, 231 B.R. at 775-76.
I determine that this court can deny rescission at any time it
determines that the borrower cannot make the required tender. 	In
Yamamoto, the Ninth Circuit upheld a decision in which the trial
court denied rescission, without ever determining whether a TILA
violation occurred, where the lender established that the borrower
was unable to tender of the Net Loan Proceeds.
[T]here is no reason why a court that may alter the
sequence of procedures after deciding that rescission is
warranted, may not do so before deciding that rescission
is warranted when it finds that, assuming grounds for
rescission exist, rescission still could not be enforced
because the borrower cannot comply with the borrower’s
rescission obligations no matter what. 	Such a decision
lies within the court’s equitable discretion, taking into
consideration all the circumstances including the nature
of the violations and the borrower’s ability to repay the
proceeds.
Yamamoto, 329 F.3d at 1173 (emphasis in original).
In the present case, Trustee is unable to make the required
tender immediately. 	Trustee should not be afforded additional time
to make the tender, because the Bank will be entitled to take all
the proceeds from a sale of the Residence, whether or not the Senior
Loan is rescinded. 	In this situation, it would be inequitable to
continue to restrain the Bank from exercising its right to foreclose
upon the Residence, when such restraint would provide no meaningful
benefit to the bankruptcy estate or Debtor.
Case: 09-03011 Doc# 30 Filed: 12/11/09 Entered: 12/14/09 08:06:08 Page 12 of
14

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
-13-	MEMORANDUM DECISION
CONCLUSION
The Bank’s violation of TILA was not egregious and Debtor is
insolvent. 	As a result, Trustee should be required to tender the
Net Loan Proceeds before the Senior Loan is rescinded. 	Trustee
cannot make such a tender at this time. 	Trustee should not be
afforded additional time to make the tender, because the sum of the
required tender and the amount due on the Junior Loan substantially
exceed the proceeds that could be obtained from a sale of the
Residence. 	Accordingly, the court will enter a judgment in the
present action denying enforcement of Trustee’s notice of
rescission, and will enter a separate order granting the Bank’s
pending motion for relief from stay.
**END OF MEMORANDUM DECISION**
Case: 09-03011 Doc# 30 Filed: 12/11/09 Entered: 12/14/09 08:06:08 Page 13 of
14

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
Court Service List
Peter D. Manning, Esq.
Law Offices of Peter D. Manning
941 West Hedding Street
San Jose, CA 95126
Michael St. James, Esq.
St. James Law
155 Montgomery Street, Suite 1004
San Francisco, CA 94104
Les Zieve, Esq.
Law Offices of Les Zieve
17682 Beach Boulevard, Suite 204
Huntington Beach, CA 92647
Timothy M. Ryan, Esq.
The Ryan Firm
1100 N. Tustin Avenue, Suite 200
Anaheim, CA 92807
Daniel J. Mulligan, Esq.
Jenkins, Mulligan & Gabriel LLP
225 Bush Street, 16th Floor
San Francisco, CA 94104
Case: 09-03011 Doc# 30 Filed: 12/11/09 Entered: 12/14/09 08:06:08 Page 14 of
14